“If we don’t fundamentally change the movement of money, we will continue to finance ourselves into extinction.”
In Episode 4, we speak to Onno van den Heuvel (United Nations Development Programme), Andrew Mitchell (Global Canopy and Equilibrium Futures) and Gwen Yu (BNP Paribas Group) to answer this and other key questions as we explore the role of sustainable finance in creating a nature-positive economy as part of a green recovery.
2:52 Onno van den Heuvel
17:04 Andrew Mitchell
32:27 Gwen Yu
Andrew Mitchell: If we don’t fundamentally change the movement of money, we will continue to finance ourselves into extinction.
Colm Hastings: Welcome to The Green Renaissance, a podcast series from the Partnership for Action on Green Economy that aims to unpack the green recovery debate. This month, Sustainable Finance. With COVID-19 the product of a biodiversity crisis, how do we redirect finance flows to create a more nature-positive economy tomorrow? First, Onno van den Heuvel, Global Manager of BIOFIN at the United Nations Development Programme.
Onno van den Heuvel: And some of the work that we’re doing, we thought may be at risk. Maybe they’re going to stop, working on some of the finance solutions. But in general, governments became very aware that they need more sustainable finance flows. They need to be more financially resilient. And a lot of that work has instead been accelerated.
Colm Hastings: Next, Andrew Mitchell. Founder of Global Canopy and international thought leader on natural capital finance.
Andrew Mitchell: But when you’re in a crisis, and an emergency – and we are in a climate crisis and we are in a nature emergency – the biggest risk of all, is doing nothing. And that’s often what’s happening.
Colm Hastings: And finally, Gwen Yu. Head of Engagement Transformation at the BNP Paribas Group.
Gwen Yu: And people are listening to them. We have boards of companies and management really focused on this, because it’s also an important indication of where we’d like to go. I mean, we’re a 200-year old company, and if we want to stay for another 200 years, that’s something that we need to take into consideration.
Colm Hastings: Subscribe on SoundCloud, Spotify or wherever you get your podcasts. I’m Colm Hastings, and this is The Green Renaissance.
Colm Hastings: COVID-19 – a zoonotic disease whose spillover can be traced to biodiversity loss and environmental degradation – has turned our world upside down, showing that the economic impacts of nature can bite back in a more devastating and immediate way than those from climate change. The World Economic Forum last year identified biodiversity loss as one of the top five threats to humanity. COVID-19 has now fast-tracked this process, leading United Nations Secretary-General, Antonio Guterres, to now call on the world to reset our relationship with nature.
Colm Hastings: But how? All eyes will be on China later this year, as world leaders meet to outline a new Global Framework for Biodiversity. And one word that will be on everyone’s lips, is finance. Why? Well first, because biodiversity needs finance. And second, because a decades-long failure to integrate nature-related risks into financial policies, models and decision-making processes is one of the key reasons we now find ourselves in the position we’re in.
Colm Hastings: COVID-19 is therefore nature’s wake up call, so the key question for our guests this month is – how can sustainable finance help us to reset our relationship with nature? And what are the steps that governments, businesses, and financial institutions can now take to redirect finance away from nature-negative outcomes, and towards those that build a nature-positive economy, tomorrow?
Colm Hastings: First we speak to Onno van den Heuvel, who is a Global Manager of BIOFIN – the Biodiversity Finance Initiative led by the United Nations Development Programme. Onno leads the initiative’s work to mobilize finance for nature at the global and national levels, and here he explains how sustainable finance can advance a green recovery.
Onno van den Heuvel: I think that we have to integrate sustainable finance at different levels. The first level is the sort of big picture thinking about the overall recovery. I think we have to put nature at the foundation of our thinking, and integrate it into everything we do. I think a lot of the economic models that you see out there still don’t integrate nature enough into its basic thinking. And that’s perhaps one of the reasons why this pandemic happened in the first place.
Onno van den Heuvel: And looking more at the practical level, there’s a lot of evidence that zoonotic diseases are linked to the loss of nature, and the wildlife trade, and this presents risks to further outbreaks in the future. So I think that recovery strategies should take this into consideration, and put a very strong emphasis on investing more in both the protection of the nature that we still have, and also in the restoration of important ecosystems so that this could help to reduce the risk of future pandemics.
Colm Hastings: I guess as a next question then in terms of integrating nature into recovery plans. There’s also obviously at the moment quite a big need for biodiversity financing. So how can different public, private, domestic, international – all these different types of financing models, resources, and also of course policy instruments – help to address these?
Onno van den Heuvel: Right, so I think first of all talking about the needs. They are actually very high and they’ve just last year become even higher. There was a report that came out recently by the Paulson Institute, TNC and Cornell – and this report estimated the global finance gap is between $600 and $800 billion a year. And this is a very significant amount and this was before the pandemic. And our BIOFIN team also made a calculation of how much the world is spending on biodiversity, and this is around under US$20 billion years per year.
Onno van den Heuvel: And so if you compare those amounts we need to really step up our efforts to make a four or fivefold contribution to what we’re already doing currently. But there is another very important figure that we have to look at as well. The OECD has made a calculation on how much the world is spending on activities that are harmful to nature. It’s more than $500 billion and the experts said that probably the real amount is even higher than that.
Onno van den Heuvel: And if you look at those amounts and that’s what BIOFIN, the Biodiversity Finance Initiative has done, it shows that our financing strategy in our recovery strategies should take into account both those different needs. We always need to increase the investments in biodiversity positive areas, as well as help to reduce negative impacts from, let’s say, sectoral investments. And the way that we’re doing this is by creating finance plans at the national level.
Onno van den Heuvel: So what that really means is, working on a number of mechanisms in each countries that have the best potential to reduce this finance gap that is not only at the global level very high, but in most of the countries too, we made a measurement on how much those gaps are and they are often in the range of tens or hundreds of millions in most countries. But the sort of good news is that there are a lot of mechanisms out there. So just to give you a few examples, Costa Rica in the past has set up a scheme of Payment for Ecosystem Services that over the last decades has made a major contribution in reforestation of the country. It’s known as one of the best success stories in biodiversity finance.
Onno van den Heuvel: And that’s by now a more established mechanism, but some countries are trying something totally new. For example, in South Africa we are working to support a tax break for the establishment of new private protected areas. So if you create a new protected area on your land, you can write off the value of your land from your future tax bills. And in another example, in the Philippines, we are working on a Fintech application, with a payment platform called GCash. And so they created a new app which is called GCash Forest. And if you install that app, and you carry out sustainable activities like walking or buying green products, renewable energy and so on, you collect points in this app. And when you collect points, a tree grows in the app. And when that tree in your app is fully grown, a real tree is being planted somewhere in the Philippines. And by now, already more than 100,000 trees have been planted. And so that’s a direct contribution to restoring ecosystems.
Onno van den Heuvel: There are a lot of other mechanisms out there, and we have done a kind of global mapping and we’ve put them all in what we call the BIOFIN Catalogue of Financing Solutions. This database found more than 150 different opportunities for countries to pursue their financing agendas. So it shows that you have to look with a very broad perspective. And when you develop your green recovery strategy, there’s all these options to look at. Why not consider them as part of your strategy, because every country needs finance. It should not just be a direct investment.
Colm Hastings: I think as you said as well about COVID-19 not being a health crisis, but really an environmental crisis. A biodiversity crisis. And in many ways, it’s become quite an ironic spokesperson for our relationship with nature. But has it also unlocked any new opportunities for biodiversity finance? And how is UNDP’s work through BIOFIN, for example, helping to support that?
Onno van den Heuvel: One of the areas that we have been exploring is crowdfunding, because actually crowdfunding is a mechanism that doesn’t bring very high amounts of money in general. It brings smaller amounts, but they are very people specific. But we thought that this is the time to help those people who are most in need. So we started to run a couple of crowdfunding campaigns. And the first one was in the Philippines.
Onno van den Heuvel: There is a National Park on the island of Mindoro, which is the last resort for the remaining population of Tamaraw – a wild dwarf buffalo. Only 480 remain, and there are rangers there and there are people from local groups, they are working actively to conserve them. But suddenly they lost a part of their income and they still try to continue to work. And so we thought these are the kind of people that we want to help with this campaign. So we set up the crowdfunding campaign and worked with a lot of partners on the ground, to raise money for those rangers and also distribute food packages.
Onno van den Heuvel: And the campaign has raised more than $32,000 in total, really exceeding the targets. And most of all, it raised a lot of awareness about the plight of those people that are actually the conservation heroes. They’re protecting this nature, not just for them but perhaps more for us. They’re protecting this on behalf of our planet. So I think these campaigns are really important to show a strong signal to those communities that this is of great global importance.
Onno van den Heuvel: Those are indeed very welcome interventions, but looking more at a larger scale, another mechanism that has received more support is what we call Debt for Nature Swaps. Because another impact is that governments around the world are facing all-time high debts. And so what can you do there in terms of financing? That’s quite a challenge. So there’s a mechanism that’s been deployed from the 80s. It’s called Debt for Nature Swaps, where the debt can either be bought off by a third party, or it can be even forfeited. And in exchange, the government or the country itself spends money on conservation. And this mechanism was very popular in the 80s and a bit in the 90s, but lately sort of got out of vogue. But now a lot of countries are looking into this mechanism to also reduce the debt and at the same time have a positive impact on conservation.
Onno van den Heuvel: I want to mention one more example, which is trust funds. Because then again looking at the recovery, we also saw that some finance flows are more vulnerable than others. Public budgets were decreasing, because there is a need to reallocate money to responses. Tourism revenues were obviously down if not out. But there is a mechanism which is called Conservation Trust Funds that has been implemented already in more than 50 countries.
Onno van den Heuvel: There are different models. One of them is an Endowment Fund, where you put the money into the fund, invest this money and with the revenue you spend on conservation. Or you can have a Revolving Fund, where you have a fixed source of revenue that keeps bringing money into the fund and you spend that. And these funds fared much better during the pandemic then other financing mechanisms. The bottom line is that for every situation the financing opportunities and needs change, and we have to always keep adapting by trying new creative solutions. And we need to create more mechanisms that are more resilient when these kind of downcycles happen to the economy.
Colm Hastings: Another question I had just here was to – I think you’ve already spoken about this a little bit, but speaking to UNDP’s own experience, particularly over the course of the past 12 months in working I imagine quite closely with governments. Have they shown a greater willingness to reassess or re-evaluate their relationship with nature?
Onno van den Heuvel: To answer that question, I think the situation is actually a bit fragmented and siloed. If you talk to the Environment Ministry, and that’s what we do a lot, of course these kind of areas are on the agenda, and the Environment Ministries are strongly promoting green recovery and nature-based solutions. But the real challenge is to make sure that every Ministry takes biodiversity as a starting point, and I think there it’s a kind of more of a mixed bag. Under BIOFIN, we are primarily working with Ministries of Finance, because we realized if you work on biodiversity finance, this is a finance issue dealing with biodiversity rather than the other way around.
Onno van den Heuvel: So we have to work closely with Finance Ministries, and Finance Ministries are actually very interested in this kind of stuff. They want to improve their budgeting processes. They want to look at which subsidies are harmful. So I think that moving forward, we need to make sure that we work more with Finance Ministries, but also more with other sectoral ministries, and we need really an all-of-government approach. We need to work also with local government. We need to work with central banks, development banks. There’s a whole big group of stakeholders to work with.
Onno van den Heuvel: And there are a number of things we can do, and I just want to give you one example. In Sri Lanka we have worked on a sustainable finance strategy together with the central bank and also the IFC. Now this strategy has been adopted, and each individual financial institute has its own strategy and its own goals and its own commitments under the central strategy. Again, it’s an example of a kind of voluntary, bottom-up approach. So there are ways to bring people together at the national level, and we have to explore every time what are the best options for the specific stakeholder that we work with?
Colm Hastings: So linking it I guess to broader international processes. 2021 is obviously going to be a very busy year now for biodiversity, and then we also have quite a number of different international events and summits ongoing. So we have the COP for the Convention on Biological Diversity at the centre of that later this year. We have the ongoing Task Force for Nature-related Financial Disclosures. So how does some of the work, I guess some of the initiatives that you’ve spoken to just there. How do they fit into these international processes, and what would you hope to see as the outcome of these?
Onno van den Heuvel:
So first of all, there’s the Convention on Biological Diversity. And resource mobilization is at the heart of the discussions there. What I hope is that one of the targets that’s under discussion is for every country in the world to develop a biodiversity finance plan. That would mean every country sort of scanning their country to see how much they are spending, what are the mechanisms that are already out there, and then develop a plan to really fill the finance gap at the national level. So unless we have these plans, these huge financial needs are unlikely to be met in the future I think.
Onno van den Heuvel: Of course this is exactly the kind of thing we are working on, and we have actually seen that when countries are undertaking these plans, they’re actually creating their own unique methodology that’s firmly rooted into the national context. If you develop and adopt these targets, it could be a kind of win-win situation for countries as a kind of more voluntary mechanism, because nobody will dictate what exactly should be in the plan. In that sense, you can compare it a bit more to the concept of the NDCs in climate.
Onno van den Heuvel: And talking about climate, I would also love to see that the other Conventions are taking biodiversity more as a starting point rather than as an afterthought, or something that they have to address as a cross-cutting issue. In particular, at climate, because I think there have been a lot of attempts to look more at nature-based solutions, but we need a bit more of a comprehensive approach. We need to look again at the two sides of the coin. How can climate interventions be also biodiversity-positive investments? And how can we make sure that there are no negative impact from climate investments? For example, there are things like hydropower and renewable energy, they can have some kind of negative impacts and we have to make sure that those are always minimized. So I really hope that there’s a new momentum among all those Conventions to really work together as one global partnership. That will be actually number one on my wish-list.
Colm Hastings: I think as a final question, I was going to ask I guess as a more personal question which I’ve been asking I think most of our guests so far. Whether the global response over the past 12 months from, in this case from governments, also from the private sector, from financial institutions. Whether that’s made you more or less hopeful that the world is now moving in the right direction.
Onno van den Heuvel: Well looking at 2020 and what happened, I think the answer is a firm yes. If you work on biodiversity finance, there’s a lot to be hopeful about. You’ve already mentioned the Task Force on Nature-related Disclosures, but overall we see a very strong rise in attention in the finance sector. Financial institutes are starting to report on biodiversity. They are starting to look at the risks that relate to investments in nature. And I think we see a similar momentum arising that we have seen in the past for climate, that we just haven’t seen before.
Onno van den Heuvel: And if you look at commitments by governments, they are also quite strong. Like the commitment by France to spend at least 30% of the funding from climate on nature-based solutions. Really recognizing this link and perhaps for the first time, really bridging the silo between the Conventions. And some of the work that we’re doing, we thought may be at risk. Maybe they’re going to stop working on some of the finance solutions. But in general, governments became very aware that they need more sustainable finance flows. They need to be more financially resilient. And a lot of that work has instead been accelerated.
Onno van den Heuvel: Of course, the global situation is not in good shape, but I think there’s a lot of hope on the horizon, and a lot of very positive momentum about biodiversity finance. And we do hope that the Biodiversity Convention will be really a landmark event to come with a new vision for biodiversity finance. And that vision should really look at finance in a comprehensive way, looking at the two sides of the coin. To promote more biodiversity-positive investments, and also help to reduce those areas that have negative impacts. Because if not, we’re going to look in 10 years at the same estimates that I mentioned in the beginning, and they’re going to look exactly the same.
Colm Hastings: Next we speak to Andrew Mitchell. Andrew is the founder of Global Canopy and Equilibrium Futures, and an international thought leader on natural capital finance. Andrew also sits on the Technical Advisory Group for Finance that will form part of the Global Biodiversity Framework negotiations later this year. And here he discusses why the language of natural capital is so important to financial decision-making.
Andrew Mitchell: This is really just another way of saying biodiversity. I’ve never really liked the word biodiversity. For many years nobody knew what it meant or couldn’t spell it and it, you know it covers everything from things you can’t see to elephants.
Andrew Mitchell: But when you’re talking to people in the finance industry or in companies, and you talk to their Chief Finance Officer about biodiversity, he starts just thinking of bees and butterflies and he doesn’t know why they should be on his account. Why should I have that on my balance sheet? I don’t get it. If you talk to him about natural capital, you’re using language that they understand because they understand financial capital. There’s a stock and a flow. You can have lots of pound notes or dollars sitting in a tin under your bed, that’s the stock. The flow is the amount you take out and go and spend on things.
Andrew Mitchell: And it’s the same with nature. We have a huge stock of nature – a tropical forest, a coral reef – and they produce a flow of ecosystem services. And a rainforest might be sucking carbon out of the atmosphere. It might be cooling the landscape by releasing vast amounts of moisture. It is also providing vast amounts of things that people can eat or timber to use, provides services to human populations as well as to animal populations. So that’s the sort of flow.
Andrew Mitchell: So when you get into a conversation with people in business about stocks and flows and natural capital – oh yeah, I get that because my company depends on a flow from nature like fresh water, or it might be agriculture where the crops coming out of the ground, I depend on the stock of good soil that’s fertile and healthy, producing a flow of commodities that are coming off it. So it’s just about languages, and this is really important when trying to move towards the economic revolution that is coming, and must come, throughout society, about understanding and getting a movement from a nature-negative economy, which is what we’re in today, towards a more circular and nature-positive economy tomorrow.
Colm Hastings: Whose responsibility is it to set this language? I know that you’ve said that in terms of integrating, for example, natural capital into the balance books, the responsibility lies at the hands of governments, of central banks. Why do you think governments have been so slow as well to take up this challenge so far? And has there been any developments in recent years that suggest things may be moving in the right direction now?
Andrew Mitchell: When you try to engage big pools of capital, pension funds and banks, in a story about nature, most of them think it’s irrelevant. And you know, it’s the same for us. When we are earning our money in wages, and you put it into a bank. You don’t ask a question well, what’s the bank doing with my money? You just go to the hole in the wall with the card and get some out every month and go and spend it. When you set up a pension fund and you’re putting in money every month into that fund and you think oh it’s going to pay out when I’m 65 years old. You don’t really ask yourself, where is that money being used, and is it good for nature or bad for nature?
Andrew Mitchell: So these are conversations that have never really happened with these institutions before. The starting point for change, really, I find having been looking at this for a very long time, was the Paris Agreement in 2015. This changed everything, because 200 governments actually agreed on something to do with climate and said we will have a two degree target and by the way we’re going to shoot for 1.5 as well. Now that translates in finance language, to a big pension fund asset manager – stranded assets. Does that mean they’re going to shut down coal-fired power stations? I’ve got millions of dollars in that. What about Shell, BP, Exxon? Are they going to be good for the next 50 years or not? Or should I be getting money out of that and putting it into renewable energy?
Andrew Mitchell: So what we saw in 2015 was the Paris Agreement, but coupled with something else like two claws on a crab. One was pinching on regulation, and the other was reporting and disclosure. And this was called the TCFD – the Task Force on Climate-related Financial Disclosure. Promoted by Mark Carney, who was then the Chair of the Financial Stability Board, and also Michael Bloomberg, who actually had the most number of data terminals in the world through which decisions were made on finance. And these two people came together and said you’re going to have to report and disclose on whether you are stuffing up the climate or not. Oooh, says a bank. Oooh, says a pension fund. Well, it’s not going to look very good if my fund is labelled as a 4.5 degree fund or a 2.5 degree fund, I better get down to two degrees. Otherwise, my customers are going to walk away and it’s going to look really bad.
Andrew Mitchell: And that’s what the power of these reporting and disclosure frameworks can apply. And it applies it globally. But, it doesn’t really work, if it’s voluntary. You get used to it if it’s voluntary, it creates awareness and you get standards, data and metrics which come in, which people start adopting and using and screening their portfolios. But it doesn’t really change the price of capital until a mandatory order comes in, and that is what’s happened this year. The UK has said that by 2025, all financial institutions and companies will have to start reporting using the TCFD framework, and France has already done it, New Zealand is thinking about it. I expect many other countries in the European Union and around the world will eventually mandate that kind of reporting. And that really shifts capital away from the bad stuff, and towards the good stuff.
Colm Hastings: On the other side of the coin, then what is the role of the private sector in also setting these rules? What responsibility do they have in also redirecting these financial flows themselves?
Andrew Mitchell: Well. Should a company or a pension fund have a moral purpose? Is there any morality about money? And up to now, everybody said no. Their purpose is to make a profit, and to hell with the planet. That’s changed. Social responsibility in a way has always been there, and CSR has grown, but you couldn’t make money out of it. And the thing that’s really changed in the last few years are these so-called ESG funds, which means they are highly-rated in relation to their environment, social and governance criteria, are making more money than the rest. And the inflows into ESG during the COVID pandemic have been extremely high. So the old adage that, oh well, you know, all that environment stuff or you know being good is fine, but it doesn’t actually make you money – we lose money – has evaporated. Anybody who still thinks that is 10 years out of date, and they are going to lose money if they don’t change.
Andrew Mitchell: And the Dasgupta Review on the Economics of Biodiversity, which was released a short time ago, has really laid bare the absurdity of this destruction of nature, and how it’s going to unpick global economies in the same way that the Stern Review did before it for climate. And it is challenging some cherished mantras that economists hold dear, one of which is GDP. This is how the success of nations, the health of their economies is measured. And I sometimes challengingly call it “gross destructive potential”. What we need is a new kind of GDP which includes externalities, a GDP X – Dasgupta called it inclusive wealth. Because the ludicrous situation we have for businesses today, is that they can trash nature for free and make a big profit. And they don’t put the trashing of nature on the balance sheet.
Andrew Mitchell: It’s called materiality. For example, a palm oil company in Southeast Asia might be enormously profitable. If I looked at that in a data terminal in my office in New York, Tokyo or London, I’d see a buy. The fact that the destruction of the forests that that palm oil company has caused, does not appear in the share price or the product it sells – now that’s why you need regulation. That is why the European Union is in its new taxonomy, non-Financial Reporting Directive and all the work it’s doing on this, is saying we’re going to look at double materiality. That is the materiality on your business, in your portfolio, the impact on the money. But also we have to look at the impact on nature. And these two things must be seen, and side by side.
Colm Hastings: Certainly we can talk about the different areas in which governments can contribute. One area that is gaining increasing ground and traction is impact investing. How would you say that governments can really facilitate the growth of that as an investment model?
Andrew Mitchell: Yeah, well impact investing in the nature space is growing quite rapidly, but it’s high-risk a lot of the time and seen as high-risk. You know if you’re trying to deal with families who are at the frontline in agriculture, dealing with coffee, cocoa and things like that in tropical forest areas, they often don’t necessarily have land tenure. They may have poor education. It’s a tricky place to put your money. Interest rates are very high with banks. But there are people who work in those environments trying to create new kinds of financial models. And that’s what we mean by impact investing.
Andrew Mitchell: And one of the things that characterizes these investments is what they call de-risking, and this means that when you’re trying to create, say, a $200 million fund, you need some sort of first-loss guarantee that if the whole thing goes completely wrong that some of the investors may get at least some of their money back. And these are called guarantees, and governments can really play a role here by taking these risks in the sort of basement level of the fund, the mezzanine level. Say if you’ve got a $100 million fund, we’ll put in $10 million into that fund as a first-loss guarantee. And then that attracts the private sectors in – what usually happens is you have sort of $10 million or something like that going in from a government. Then you might get a development finance institution coming in in the middle bit, and then you might get other banks and other investors coming in in the top.
Andrew Mitchell: So that kind of model is something that governments can really help with, and I’m delighted to hear just this week that the UK Government has launched a $150 million fund – these are called blended finance mechanisms – precisely to do these kinds of guarantees to help catalyze the impact investing market in nature-based finance. But there’s a problem. And the problem is that governments take a long time to make a decision. They’re using the people’s money after all, and often it takes them one or two years to make a decision about a relatively small investment of, say, $10-20 million. A private sector can’t wait that long. They’re paying expensive people to hang around whilst governments keep changing and people lose their jobs and new people come in and then you’ve got to convince them all over again.
Andrew Mitchell: But when you’re in a crisis, and an emergency – and we are in a climate crisis and we are in a nature emergency – the biggest risk of all, is doing nothing. And that’s often what’s happening – we’re just doing nothing, talking about it. And things like the Green Climate Fund, you’re supposed to have $100 billion a year to give away. But how long does it take to get that money out of the Green Climate Fund? It’s just not fit for purpose to work with the private sector. And that’s where the solution lies, because they’ve got far more money than all the governments have. So we have to find a way to make that work, and that means changing some attitudes and taking bigger risks.
Colm Hastings: You’ve spoken already or touched on some of the global processes that we can look forward to this year. The Biodiversity COP in China later this year. Also, the TNFD. What would you hope for or expect to come out of those processes?
Andrew Mitchell: Well, I think there’s a huge amount of pressure on the organizers of COP 15, of the CBD, and the Chinese government to create a success – an equivalent of Paris. To come up with something we desperately need for nature that we do not have, and that is – numbers. We don’t have a target for nature, the equivalent of 2 degrees. We don’t have a currency for nature, the equivalent of a ton of CO2. And this makes it very hard to measure progress, for companies and finance. So this is a really big thing for governments to do because I think for the first time the Global Biodiversity Framework needs to be sending messages to the finance sector and it needs to give them targets. And what are those targets and what are the principles they should be thinking about in relation to nature in their portfolios?
Andrew Mitchell: I believe that the Task Force on Nature-related Financial Disclosure will create a framework, a high-level framework like the TCFD. It’ll be a twin to the TCFD on nature, and it will give them that framework so that they can understand the risks they’re running and what they should be doing to mitigate them. And then we have a plethora of data, standards and metrics that lie underneath that. So they will know within a few years what it is they can do. What they need is a target, and a way of measuring it. And I think the CBD needs to come up with that as a minimum, but it’s hard. It’s hard to come up with.
Andrew Mitchell: There’s another group you know that is really important to keep an eye on, and these people tend to work in the shadows, are not known to most people in the street. They’re called central bankers. Every government has a central bank, and mostly central bankers are not educated about nature-related risk. They’ve started to get to grips with climate-related risk, and many central banks are now looking at the impact on their own national economies from climate-related risk.
Andrew Mitchell: The first one to do it for nature is the Dutch Central Bank, and they produced a report in 2020 called Indebted to Nature that used a tool that my own research group in Oxford called Global Canopy actually developed with UNEP-FI. It’s called Encore, and it allows you to look at portfolios and how they’re dependent on services from nature. And the Dutch did that, and they found enormous amounts of risk in the Dutch economy linked to nature, and they were quite, I think, probably surprised about that. And it’s a really good exercise to do, and now I’m hearing that possibly the UK will be considering to do that, and that the French Central Bank is doing it, and we’re going to see that percolate out around central banks.
Andrew Mitchell: So if there was ever a message I had for policymakers who might be listening, it’s go and talk to the treasury departments and your central banks about these issues, and they should be running tests to see the extent to which their economies are dependent on nature. And COVID-19 has shown how big that can get, and how fast it can happen. And this won’t be the end of it. There will be more.
Colm Hastings: Maybe now, just as a final question. We’ve spoken about the so many ways in which the world is changing. Has the global response over the past 12 months, from both governments and other public institutions, and then also from the private sector. Has this made you more or less optimistic that things are moving in the right direction?
Andrew Mitchell: What gives me optimism from what has happened over the last 12 months or so is the extent to which human beings all over the world have come together in a common cause, and that they have recognized that a small speck of nature can turn their whole lives upside down. It’s created a new respect for the way the world works – not in terms of going out to nightclubs and having a coffee, but the way in which the ecological system is underpinning all our lives. I don’t really think there was full recognition of that and how fragile it is. How much we love the walk on the beach. The walk along a road with beautiful spring flowers. I think people have got closer to nature because of it, and that’s a really important lesson to be relearned.
Andrew Mitchell: What makes me worried is that when you look at the Build Back Better mantras that governments say, you know all these trillions of dollars being deployed. I don’t really see too many criteria for green going into the Build Back Better. It’s build back the same, and it’s as though no lessons have been learned there. But we really do need to Build Back Better, and Build Back Better means taking account of climate, and taking account of nature.
Andrew Mitchell: It’s all about the money, and it isn’t always controlled by governments. Yes there are regulations, but the big pools of capital controlled by banks and families, family offices and by our pension funds, the people’s money often, are setting us on a course that’s not right. And if we don’t fundamentally change the movement of money, we will continue to finance ourselves into extinction.
Colm Hastings: And finally, we speak to Gwen Yu. Gwen is the Head of Engagement Transformation at the BNP Paribas Group, where she’s working to integrate sustainable finance across the business. She also represents the bank on the European Commission’s Sustainable Finance Platform, and on the Task Force for Nature-related Financial Disclosure’s Informal Work Group. And here she begins by outlining the business case for investing in nature.
Gwen Yu: Normally when we put together a business case, you kind of look at the broad macro picture. So if you look at the broad macro picture you’re like, well, what’s the market out there? Is there really opportunities there? And we’ve all heard of the big numbers, right? We’ve heard the $125-128 trillion that’s going to come, the 400 million jobs that are coming if we transition towards nature-positive. We’ve also heard $10.1, I think trillion. That’s the loss in business value for loss in biodiversity, or degradation of nature and whatnot. So that’s kind of how we start.
Gwen Yu: And then we start to look at, well, what does that really mean in terms of how do we orient and how do we scale finance into this space? Because if you talk to the layperson, everybody thinks of the bank as the person who is ultimately responsible for the money. Which isn’t really true because we’re an intermediary for our clients, right? You’ll have the institutions who are the managers, the pension funds, the asset owners, basically that says, ok, this is my big pool of cash or whatever, and then this is where I need to invest it. Then you have your corporates that are asking for this or that may have projects that need funding, so we try to match them up with institutionals. Then you have the retail players, so people like you and me that are now looking at what do I want to put my money in? How do I change my behaviour? Is this something that really matters to me now?
Gwen Yu: So if I look at that broad segment of who we’re servicing, the market that’s out there, and then also all the different headwinds that are coming up. So the external forces, like regulatory policies that are there, the fact that we have more data that’s available to all of us. The fact that there is a license to operate, not just for companies like BNP Paribas but for most of the corporate companies, other enterprises out there. Because as a society, this is something that we actually care more about and that we’re more informed about.
Colm Hastings: You touched on quite a lot of points that I think we could also expand on a bit more later. But one of those which I think you also touched on just there, was what the role of financial institutions actually is within this bigger need to redirect financial flows towards positive biodiversity outcomes. What are the concrete steps and actions I guess that the financial institutions can take to really push finance and investments in that direction?
Gwen Yu: We’ve broken it out into kind of three broad steps. So the first one is we’re looking internally – so us as BNP Paribas, what is our footprint? What are the sector policies that we have in place so that we ensure that we’re doing no harm to biodiversity, or in the things that we either are financing or for our asset management arm investing in? So this will manifest itself in primarily sector policies. When we talk about sector policies within nature, what we have in place right now at BNP as a group is looking at paper, pulp, agriculture and mining. So it’s really looking at our own footprint, and our financing portfolio, and how do we orient that going towards nature-positive.
Gwen Yu: The second thing is from a business standpoint, how are we incentivizing our clients for their biodiversity strategy or their transition towards nature-positive? So you will have things like sustainability-linked products – so this will be bonds, loans etc. We’ve done one specific sustainability-linked loan, and the KPI that it’s linked to is linked to the biodiversity target for that specific corporate. And then we’re having more of these type of conversations where the incentive itself is linked to whatever these biodiversity targets may be.
Gwen Yu: Then from a third perspective, we’re also looking at, well, what are the other innovative ways that we can scale up? Because the sustainably-linked products, they’re great, but that’s not going to get us there in the big scheme of things, right? And so one of the things that we’ve been working on in the past, that everybody has been very excited about, is everything having to do with public-private financing, and everything having to do with blended finance. Because we really see, this is a way to de-risk. This is a way to get like-minded people around the table. So it’s really the idea of having the right coalitions to push forth this overarching goal to scale financing for nature.
Gwen Yu: On the blended finance part, we’re looking at two forms of financial instruments. One is something that we’ve done in the past, which is a project bond. And within this project bond, there’s a tranche that’s guaranteed by a public institution. It’s sold to pension funds and kind of lower-risk investors. And then the medium tranche is sold to or distributed to our wealth management folks, who are typically more in-tuned right now looking at, well, what is this investment really serving in terms of the community?
Gwen Yu: Another thing that we’re working on right now is the idea of impact funds, where as part of that fund or fund-to-fund, you will have a guarantee again from a public institution, you will have the cash flow through the various economic activities that may be associated with it. We are part of the Sub-National Climate Fund (SnCF). And that’s a $750 million fund. It’s supposed to look at sub-national projects – infrastructure, waste management, natural capital, anything within that sphere – and build that into this specific fund, and be able to distribute that out to various investors.
Colm Hastings: Speaking of, I guess international processes. I know one that BNP Paribas has been heavily involved in is the TNFD. What kind of impact do you see that playing in the future? Obviously with its climate change counterpart, it’s certainly moved the chains in quite a positive direction over the past few years. Do you see the biodiversity one having the same kind of impact?
Gwen Yu: So we’re planning to launch by mid-year this year. I think that was a timeline from before, and that’s still where we’re at. I think it’s done a lot in the sense of, primarily it’s raised awareness at the right level of the importance of nature. So I think that’s kind of the first step. And then the second step is that it then allows us to start discussing, well, what are the right frameworks in terms of dependencies, impact? How should corporates and financial institutions be disclosing on this? Because then it will also allow us to be able to measure this kind of consistently.
Gwen Yu: What we’ve seen in any kind of sustainability reporting, right, in the beginning, everybody kind of reports qualitatively. And then at some point it will become quantitative. But once it becomes quantitative, then as investors, cause we also have an asset management arm, then it’ll be easier for us to compare apples to apples, and also be able to figure out which companies are actually doing what they say they’re going to do. So that you can tweak your portfolio to try to incentivize those that are making decisions towards nature-positive. And then this will also impact financing, if it goes all the way down to a cost of capital calculation.
Colm Hastings: I was reading an article by Huw van Steenis, and it was saying that obviously, when there’s a disruption it can really be a driving force for reallocating capital. Obviously I can’t really think of a bigger disruptive force than COVID-19 over the past 12 months. Do you think that it’s made the market conditions more or less conducive to mobilizing biodiversity finance? Has it had a positive impact, or has it made things more difficult?
Gwen Yu: I think overall it’s more positive, because when we were right in the thick of things, I think in March or April, we saw a spike of COVID response bonds that came out, and really just a lot of, you know, triage efforts and philanthropic efforts that went out. And you see everybody come together and kind of try to help. Then you also saw policies coming through, because the governments came in, some of the bailouts were tied to the company’s either climate or biodiversity actions going forward, so that was nice to see. I think there was also an acceleration in terms of the European Commission on what they were doing in their Green New Deal, but also within their Sustainable Finance Platform. And biodiversity is part of the broader scope of what they’re looking at.
Gwen Yu: And then the negative part of it is that we are now dealing with crises upon crises. Because climate has been very pervasive in everything, and biodiversity may be a little bit more vague in the sense that, it’s more concrete because we all know what we’re talking about. Because you see it – it’s the trees, it’s the water and whatnot – but it’s a little bit more vague in terms of how are we actually really going to measure this? What are the data intrinsic to this? Because for climate we have greenhouse gas emissions, right? So it’s easy. You see it. Then you have scenarios built-out already, so you can kind of project it out. But within biodiversity, it’s a little bit more integrated. So then how do we break this out into manageable chunks so that we’re able to measure it, disclose upon it? And then the investors and the financial community and even the governments can then make the right decisions to orient things the right way.
Colm Hastings: And I think one thing that could push people more towards having behaviours that are positive towards nature would be regulation. I know the private sector has often been, particularly in environmental policymaking and regulation, very I guess opposed to binding regulations, have always favoured really a more voluntary approach. Would you say that financial institutions at this moment in time would still be thinking the same?
Gwen Yu: I think when you come to governments and regulations, you’re right because it’s always been a carrot-stick approach, right? So you’re either penalising or you’re incentivizing. Within the private sector, most private sectors will always prefer the incentivizing route rather than penalising route, but that’s just normal, you know. If I’m a 5 year old kid, I’d prefer that as well, right?
Gwen Yu: Where we are right now is we think that it’s important for the regulators to be working with private institutions and the private sector to help with the definition of what these frameworks and guidance could be. And this is why BNP Paribas is part of the Sustainable Finance Platform. We have Helena Vines Fiestas who is our representative there, and she’s also the Rapporteur for one of the sub-groups on the usability of the taxonomy. And its regulatory-led, but with market and stakeholder input. So that it’s actually something that will be applicable for people like us, or for the corporates out there or for whoever other stakeholders that may be using it.
Gwen Yu: We welcome the fact that we need regulation in these areas because it’s like any other public good – there has to be frameworks attached. Because there are some things that we won’t be able to achieve just as a company ourselves, it will have to be done with the various governments and broader regional or developmental agencies that are out there. But where does the cursor lie, I think is more of the question.
Colm Hastings: Well obviously at the start, you talked briefly about the business case for financial institutions to invest in biodiversity and nature. I was wondering to what extent other kinds of factors now weigh-into the financial decision-making of these institutions. So I guess we’ve spoken just there a bit about regulatory risk, which could potentially increase. I think reputational risk now is something that is becoming increasingly important, particularly across different youth groups around the world, becoming a lot more aware and engaged. To what extent do all of these other factors weigh-in on, for example, BNP Paribas’s thinking?
Gwen Yu: I think that the youth segment has such a powerful voice right now. In the sense everybody is listening to them, and we need them to basically push everything else. Obviously it’s not all on them because most of us created the problems anyway. But we need their voices to kind of be amplified, and they’re very good at doing that. So we saw that with GameStop, and I think we also see this in the sense of our retention policies. Because more people are also going to work for companies that they believe are trying to do good, and it’s tied more towards their own morality, so to speak.
Gwen Yu: And we see this in our wealth management arm also, because you have a shift of wealth moving down the generations. I’m generalizing here, but on the whole as you move towards the next generation then you see more focus into impact investing or where the money is actually going to go. And I think as a consumer group as a whole, they have large spending power that’s only going to get bigger. And we will all be accountable for that piece of the money, all the way from your savings account, your pension funds, financial instruments, the businesses that they eventually start. Because why should I bank with you when I can bank with this other bank that’s cleaner? And we’re having those conversations with some of our clients who are within this generational scope.
Gwen Yu: So we definitely see this move, and this democratizing of finance as a whole. I think we saw this with digital right, with banks where you don’t really need to go to the banks anymore. And everybody knows who they are so I don’t need to mention them. And crowdfunding, because you will be able to fund more locally, more relevant projects to you within your community. Then we’ve also seen IPOs now that are being done through crowdfunding methods.
Gwen Yu: So all that I think is linked to the youth segment. The fact that they are able to organize very well. The fact that data is readily available, and they know how to use it. And people are listening to them. You have boards of companies and management really focused on this. Because it’s also an important indication of where we’d like to go. I mean, we’re a 200-year old company, and if we want to stay for another 200 years, then that’s something that we need to take into consideration.
Colm Hastings: That was The Green Renaissance. Please subscribe on SoundCloud, Spotify and wherever you get your podcasts to receive new episodes each month. Also, don’t forget to give us a rating if you enjoy the series, as the more ratings we get, the more people will be able to discover us. In the meantime, if you’d like to learn more about the Partnership for Action on Green Economy, the PAGE 2020 Annual Report has now been released. This highlights the Partnership’s ongoing work in supporting inclusive green economy transitions within its twenty partner countries, and you can visit www.un-page.org to check it out. Thank you for listening, and until next time.